AbstractThis research finds that the contract of the life insurance begins binding when the agent receives the premium.The principal is responsible for paying the compensation claimed by the policyholder although the insuranceagent having received the premium has not deposit it into the principal’s account. If the agent is proven not toimplement one of or several or all his/her obligations, the principal will punish him/her with giving verbal and/orwritten admonition, temporary suspension for agency-related activities or unilateral termination of the contract. Ifthe agent is proven to break the rules i.e. to give the policyholder irrelevant or false and/or misleading informationregarding to the risks, benefits, rights, and responsibility of life insurance contract, and not to transfer thesubmitted premium by the policyholder, he/she will be sued with maximally 5 (five) years in prison and with Rp5.000.000.000,- (five million rupiah) as maximum fine to be paid. Thus, it is necessary to apply a goodrecruitment system and to select the agent who has good moral and ethics. He/she should well understand thenature of the contract of the life insurance.IntroductionThe insurance in a legal terminology refers to an agreement (Merkin 2007, 3). An insurance agreement offers aguarantee of an uncertainty due to economic loss which people may suffer for uncertain event (onzeker voorval).Such an uncertain event (onzeker voorval) is so-called risk. The risk will emerge whenever people cannotperfectly handle the situation, or previously know how it will be (Diacon and Carter 1984, 3).The life insurance product is a promise of benefit-value or compensation given to the policyholder.In order to improve the number of policyholders, the principal requires to construct a marketing systemthat links with prospective policyholders. Within the system, the agent becomes the basis of the productmarketing. The agent gets in touch with prospective policyholders and immediately reports all information he/shehas got from the principal (Chai 1992, 307).This paper discusses the nature or the characteristics of the contract of life insurance agency related tothe principal’s and the agent’s responsibility.1. The correlation between the Principal and the Agent of Life InsuranceThe term agency is derived from English ‘agent’ (Birds 2013, 209) which refers to an agent, a representative, ormediator. Black Law Dictionary defines that ‘agency is a fiduciary relationship created by explicit or impliedcontract or by law in which one party (the agent) may act on behalf of another party (the principal) and bind theother party by words or actions’ (Campbell 1999, 1322). However, the Civil Code of Netherlands, Article 7: 428cites:’An agent must be an independent intermediary. There is no employee-employerrelationship between him and his principal. The agent does not act in his own name, but inthe name, to the expense and at the risk of his principal. There must be a steadyrelationship between principal and agent; incidental mediation is not enough to constitutean agency contract’ (Harkamp and Tillema 1995, 154).Agency is referred to as the fiduciary relationship that arises when one person (a principal) manifestsassent to another person (an agent) that the agent will act on the principal’s behalf and subject to the principle’scontrol, and the agent manifests assent or otherwise consent so to act (Han 2010, 4). The Insurance Associationof Pakistan defined:’ an insurance agent is representative of an insurance company in soliciting and servicingpolicyholders.’ An agent’s knowledge concerning an insurance transaction is said to be the knowledge of theinsurance company as well. Wrongful acts of the agent are the responsibility of the company; these bind thecompany to the customer. Notice given by an insured to the agent is the same as notice to the company.The essentials of agency are few… first, the relation is a consensual one; an agent agrees; or at leastconsent to act under direction or control of the principle. Second, the relation is a fiduciary one; an agent agreesto act for and on behalf of the principle. He is in no sense a proprietor entitled to the gains enterprise –nor is heexpected to carry the risks (Rasmusen 2011, 4).The legal relation between the principal and the agent is based on the agency agreement assented byboth parties, organizing each party’s right and responsibility. The agent in life insurance business is an individualworking under the principal’s authority with commission system as reward.In an agency agreement, there are several parties: (a) the principal, a party who manifests assent towardan agent to do certain legal acts in relating to the policyholder/the third party. The agent is nominated by theprincipal written-contractually, including the rights and the responsibility for each party; (b) the agent, a party wholegally acts on behalf of the principal in relating to the policyholder/the third party addressed in the agreement,including the rights and the responsibility for each party; and (c) the policyholder/the third party, a party wholegally acts or transacts with the agent (Putera 2014, 29).The agent makes an agreement with the principal so that evokes legal relation of a partnership, not anemployment. In this relationship, both parties are in the same level, without any subordination as the relationshipbetween employer and employee. In fact, however, the relationship between the agent and the principal issubordinative one.The nature of the relationship between the principal and the agent is authorization. As addressed in article1792, Burgerlijke Wet Boek (BW) states that ‘The manifestation of assent refers to an agreement that a personmanifests an assent toward another one, the receiver, in order to legally act on behalf of the principal in relatingto a given task.’ Such manifestation is based on the consent addressed in the form of an agency agreement.Article 1795 BW regulates the manifestation of assent primarily on the part of the principal. It is based on Article1338 of BW section (1) BW: ‘every legitimate agreement serves as rule for those who construct it.’The contract of agency can be made by the principal and the agent with mutual consent. This contractemerges because of necessity to efficiently distribute the principal’s product. It is an efficient way to sell the policyof life insurance. It is the right choice for the principal because first, the principal has a limited financial capacity tohandle the whole activities offered in particular region due to his/her worry to risk concentration; second, theVolume VII, Issue 5(19), Fall 20161039principal get into a new region which needs to provide a variety of services, at least, to the prospectivepolicyholders such as claim, premium collection, and question-answering for the prospective policyholders.Hence, the principal needs the agent to assist him/her in doing those action (Rastuti 2011, 67). According to LeviLana, however, the principal needs the agent due to several reasons: first, the principal does not control themarketing area for his/her goods and services; second, the principal is too busy with his/her primary task, thus,he/she requires to delegate his/her task; or third, the principal needs another party with wide connection inbusiness and marketplace in order to make the marketing target of goods and services achieved (Moniung 2015,125).Life insurance industry gives its big concern on the code of ethics, because the development of insurancebusiness is highly related to the agent. Thus, the code of ethics is required to make the agent professional inorder to prevent misconception, controversial perception. It regards the insurance agent as a noble profession(Sendra 2004, 118). To carry out his/her responsibility as the agent of life insurance, the code of ethicsestablishes the following behaviors:(a) Upholding the trust that is given by the principal friendly, politely, by discipline, and honestly inaccomplishing the task, giving the best effort to increase people awareness of insurance, andreinforcing the company he/she represents;(b) Prioritizing the policyholder’s and the principal’s interest by providing the best service for them,including for those who get the benefit of the insurance;(c) Applying proper ways and not breaking the code of ethics in order to have or release the prospectivepolicyholder; firmly avoiding any improper ways which may degrade his/her profession as themarketing agent of life insurance; and not establishing any irrelevant agreements dealing with therule of policy;(d) Giving the correct, complete and precise explanation to the prospective policyholder for makingdecision that corresponds to the needs.The life insurance agent is forbidden to do the following actions on his/her daily routine:(a) Conducting propaganda which discredits and ruins the good will or profile of the insurance company;(b) Selling insurance product without any license;(c) Seeking personal gain from his/her profession as the agent, by moving from one company to anotherone;(d) Transferring or buying the policyholder from another insurance company (twisting) to get goodperformance from the company which may harm the policyholder;(e) Selling the insurance product by providing obscure and dishonest explanation (misrepresentation)which may mislead the policyholder in selecting the proper product for their needs; and/or the toohighcoverage.(f) Selling the insurance product with promising any discount and other pieces of gifts.(g) Misusing the premium, compensation, insurance of policyholder; and(h) Hiding and/or falsifying data and information about the policyholder or the insured and the benefitrecipient in order to obtain high provision or commission for personal benefits. This may ignore theutmost good faith and insurable interest.The contract of agency between the principal and the agent produces the authority for the agent. Theinsurance agent has three authorities: first, an authority explicitly stated in contract with the principal that is thelife insurance company; second, an implied authority. The law states that obtaining the authority adequatelyconsidered by the public is possessed. The law states that the public cannot be expected to know and identify thetruly requirements of the agency contract. The public believes that the agent has the authority to do any particularactions compatible with the law. Third, the agent has the external authority, that is, an authority done by the agentand simply ignored by the principal (Ali 2002, 312).In general, the agent’s rights dealing with agency services are: (a) the right of commission. The agent’sright to get commission of all his/her services from the principal is a right embedded to the practice of agencyinsurance. Therefore, the agency correlation is based on a contract; thus, in general the commission as theagent’s right is explicitly based on the agency contract; (b) the right to reimburse all cost and expense which theagent spends to do certain agency tasks on behalf of the principal; and (c) the right to be gotten off all legalresponsibility. The principal’s right emerges as the consequence of fiduciary duties the agent conducts whichproduces fiduciary rights (Hardy 1979, 547).Journal of Advanced Research in Law and Economics1040The primary responsibilities which the agent owes to the principal are: (a) carrying out the transactionwhich must be carried out; (b) obeying his instructions and strictly acting in accordance with the terms of hisauthority; (c) acting with reasonable and proper skill; (d) calculating the received money; and (e) dealing honestlywith the principal.The life insurance is declared valid and binding on the parties since the premium has been received by theinsurance agent (Article 28 section 3 of the Act on insurance). It is also as stated in Article 255 of Trade Codethat ‘the rights and responsibilities of policy-insurer and policy-holder emerge on which the insurance is coveredalthough it is not published yet.’Practically, the insurance coverage is evidenced by the approved application or the signed cover note andthe paid premium. Furthermore, when the insurance is directly covered by the prospective policyholder or therepresentative, the policy should be distributed to the prospective policyholder by 24 hours after it is signed by theprincipal. When the insurance is covered by agent, the signed policy should be distributed by eight days after thecoverage.2. Principal’s and Agent’s Responsibility for PolicyholderThe implementation of the agency contract means that the agent is involved in selling the principal’s product, sothat the agent does his/her work on behalf of the principal. The contract contains the rights and responsibilities forselling the product of life insurance to the prospective policyholder; collecting the initial premium of the soldproduct and reporting to the principal; and submitting all documents from the prospective policyholder, includingthe life insurance application form and health certificate.Practically, the agent often does any activities that harm the principal, such as giving any irrelevant, fake,and/or misleading information on the risks, benefits, rights and responsibilities that attach to life insuranceproducts. Furthermore, the agent does not submit the paid premium by the policyholder, so this behavior makesthe company loss. In this case, Article 28 section (7) of the Act on Insurance cites that ‘Insurance companiesshall be responsible for paying available claim if the agent has received the premium or contribution, but has notdeposited it into the company’s account yet.’Similarly, Article 73 Regulation of Financial Service Authority No. POJK 2/POJK.05/2014 on Managementof Good Insurance Company regulates that in case of selling the insurance products through the agent, theinsurance company shall fulfill the following requirements. The insurance company shall have an insuranceagency contract with the agent selling the products; and the agent shall have an agency certificate launched byinsurance association. Consequently, the insurance company selling the products through the agent is fullyresponsible for problems which emerge due to any insurance coverage done by the agent.In order that the agent does not violate those requirements, the principal selling the products through theagent, therefore, have to provide a continuous education and training for the agent’s high competence andintegrity; have to obligate the agent to obtain an agency certificate; have to obligate a predetermined code ofethics within the agency contract by the association for insurance company; and have to obligate the agent toobey the code of ethics predetermined by the association.If the agent is proven to violate his/her responsibilities which makes the policyholder losses, he/she will geta verbal and/or written warning, and/or even unilaterally termination of the contract.In deal with the agent who does not deposit the paid premium into the principal in particular, he/she shallpay the compensation which emerges due to his/her action. The indemnification consists of cutting his/her bothprovision and bonus, and suspending his/her agent license or an assurance form the agent have to sign.The Act on Insurance also regulates that the agent is forbidden to embezzle the paid premium orcontribution, and the agent shall provide relevant and true information to the policyholder, insured, or participantson the risks, benefits, responsibilities, and charges of insurance products offered.Article 75, the Act on Insurance addresses that ‘anyone who intentionally provides any irrelevant, fake,and/or misleading information to the policyholder, insured, or participant will be sued with maximally 5 (five) yearsin prison and with Rp 5.000.000.000,- (five million rupiah) as maximum fine to be paid.’ On the other hand, Article76 cites that ‘anyone who embezzles premium or contribution will be sued with maximally 5 (five) years in prisonand with Rp 5.000.000.000,- (five million rupiah) as maximum fine to be paid.’Based on those enactments, the agent who intentionally provides irrelevant information and misuseshis/her authority by embezzling any paid premium will be sued with maximally 5 (five) years in prison and with Rp5.000.000.000,- (five million rupiah) as maximum fine to be paid as the consequence for what he/she did.Volume VII, Issue 5(19), Fall 20161041ConclusionsThe agency contract is conducted between the agent and the principal which produces a legal relationship.Meanwhile, the legal relationship evokes rights and responsibilities for both the principal and the agent. It isregulated in the Code of Ethics on Agency and the Act on Insurance.It is a must for insurance company to bear any loss caused by the agent who provided irrelevant, fake,and/or misleading information dealing with the risks, benefits, rights and responsibilities of the offered insuranceproduct; and those who did not deposit any paid premium into company’s/principal’s account.The principal has an authority to give a verbal and/or written warning, temporary suspension dealing withthe agent-related activities, and even unilaterally termination of agency contract. In addition, the agent who isproven abusing the code of ethics on agency will be sued with maximally 5 (five) years in prison and with Rp5.000.000.000,- (five million rupiah) as maximum fine to be paid.References1 Birds, J. 2013. Birds’ Modern Insurance Law. London: Sweet & Maxwell.2 Chai, P.C. 1992. Law of Insurance. Singapore: Longman.3 Diacon, S. R. and Carter, R.L. 1984. Succes in Insurance. 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